California Appeals Court Affirms Federal Forum Provision in Securities Act of 1933 Case

On April 28, 2022, the California Court of Appeal affirmed a San Mateo County Superior Court’s dismissal of a securities class action case on the basis that the defendant, Restoration Robotics, Inc. (which was subsequently acquired by Venus Concepts Ltd), had adopted a federal forum provision (“FFP”), which provided that claims of violation of the Securities Act of 1933, as amended (the “Securities Act”) were required to be brought in U.S. federal courts.  Restoration Robotics adopted FFP provisions in its certificate of incorporation at the time of its 2017 initial public offering and the San Mateo County Superior Court held that the FFP precluded the plaintiff, Sunny C. Wong, from bringing a case in California State Court alleging that company’s offering documents contained materially false and misleading statements in violation of the Securities Act.  See Sunny C. Wong v. Restoration Robotics Inc., No. A161489, 2022 WL 1261423 (Cal. Ct. App. 1st, Apr. 28, 2022).

Similar to district court cases against Dropbox, Inc. and Uber, Inc., the California Court of Appeal found that the FFFP precluded the plaintiff from bringing a claim in California district court and concluded arguments by the plaintiff were unpersuasive that (i) the FFP violated the Securities Act, (ii) the Delaware General Corporation Law (“DGCL”) provision permitting the FFP violated each of the Commerce Clause and the Supremacy Clause of the United States Constitution and (iii) the FFP is invalid and it should not be enforced because the FFP is unfair and unreasonable.

The California Court of Appeal determined that Restoration Robotics’ FFP does not violate Securities Act Section 77v(a) (which prohibits removal of cases filed in state court to federal court) and Section 77n (which precludes issuers from requiring purchasers of securities to waive rights to remedies under the Securities Act). 

The California Court of Appeal concluded that the DGCL does not require Delaware corporations to implement FFPs and, therefore, the Restoration Robotics’ FFP does not constitute state action required to trigger a Commerce Clause inquiry and even if it were to do so, Delaware has a legitimate state interest in enabling corporations to include FFPs in their certificates of incorporation (to reduce the inefficiencies and costs of defending cases in state and federal court regarding the same conduct).  Moreover, the burden imposed by FFPs are “slight when compared with the benefits.”  Id. at *9. The California Court of Appeal also concluded that the Supremacy Clause is not violated by Sections 111 and 115 of the DGCL.  DGCL Section 111 gives the Delaware Chancery Court jurisdiction over certain civil claims concerning contractual disputes over stock sales.  DGCL Section 115 allows the certificate of incorporation or bylaws of a Delaware corporation to require internal corporate claims to be brought exclusively in Delaware state courts, and also prohibits barring the bringing of internal corporate claims in Delaware state courts. 

Lastly, the California Court of Appeal found that Delaware law, not California contract law, should apply to the validity of the FFP. In doing so, the Court summarized the internal affairs doctrine, noting that “law of the state of incorporation applies to an action that concerns the ‘internal affairs’ of corporations….[A]s a general matter, the validity of a certificate of incorporation, including the validity of its provisions, is a type of internal affair….” Id. at *13 (internal citations omitted).  Pursuant to Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the FFP is valid.    The California Court of Appeal determined that purchasers of the Restoration Robotics shares should have expected that the certificate of incorporation attached to Restoration Robotics’ registration statement filed with the Securities and Exchange Commission would govern the terms of the shares and noted that “we hesitate to agree that an investor is excused from the required disclosures, particularly when they concern the governing documents of the corporation.” The California Court of Appeal additionally found that enforcement of the FFP was not unconscionable, particularly in light of the availability of a federal forum in a shareholder’s state of residence to bring a claim.

As a result of its analysis of the plaintiff’s arguments, the California Court of Appeal upheld the San Mateo County Superior Court’s judgement of dismissal without prejudice.

This e-Bulletin was prepared by Julia Reigel, a partner of Wilson Sonsini Goodrich & Rosati, P.C. Ms. Reigel is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.